As the Goods & Services Tax completes its eighth year, there is renewed hope that a restructuring of rates is on the cards. A key proposal reportedly under discussion is to either reduce the GST on certain essential items from 12 per cent to 5 per cent or to eliminate the 12 per cent slab altogether. This will bring major relief to middle- and lower-income households and help the Bharatiya Janata Party politically in the upcoming Bihar assembly election. Lending credence to the hope is Nirmala Sitharaman’s statement that work was in progress to bring down rates wherever possible and that a reduction in number of slabs was under consideration.
Most of the items now attracting 12 per cent GST are goods commonly used in everyday life by ordinary citizens. These include products that feature heavily in the consumption patterns of middle-class and economically weaker households. The plan involves reclassifying these items into the lower 5 per cent tax bracket, effectively making them cheaper for end consumers. Alternatively, the government may choose to scrap the 12 per cent slab altogether and re-allocate items into existing lower or higher slabs. Of course, a final decision will be taken at the GST Council meeting, which is due soon. The council alone holds the authority to recommend changes in tax rates.
If the proposal goes through, it would mark one of the most significant overhauls of GST rates since the indirect tax system was rolled out in 2017. When it was implemented, GST brought the country under a single indirect tax regime – goods and services sold in the country were taxed at the same rate across all states and Union Territories. The flow of input tax credit (ITC) across the board and the removal of a clutter of state-specific levies has smoothened business operations, particularly the movement of goods across states. This simplification has translated into a 33 per cent improvement in transport time, an increase in number of commercial taxpayers from 6 million to 15 million and an average monthly collection that is close to Rs2 lakh crore. E-invoicing and e-way bills have had a transformative impact.
This is then perhaps the right time to take a major crack at reforms. In 2024-25, GST recorded its highest-ever gross collection of Rs22.08 lakh crore, reflecting a year-on-year growth of 9.4 per cent. The average monthly collection stood at Rs1.84 lakh crore.
As the GST completes eight years, tax experts acknowledge its successes. GST is much simpler than the previous regimes, where the sale of the same item could be taxed differently in each state. In the last eight years, significant simplification has been brought in the GST system.
However, it is time now for the next phase of reforms in the indirect tax system. Ideally, GST 2.0 must focus on four priorities: rationalising the GST rate structure, minimising input tax credit restrictions, streamlining audits and investigations and, finally, expanding the tax base by bringing in sectors like petroleum and electricity. Indeed, as India moves towards the ambition of becoming a $5 trillion economy, the GST system must move towards being a stabilising force to becoming a strategic enabler of ease of doing business, investment, and inclusive growth. Of course, while big reforms like the inclusion of fuel in the GST regime may be difficult to politically sell, the reduction in the number of tax slabs and streamlining audits and investigations surely shouldn’t be a problem.
The highest slab of 28 per cent could become the default rate for ‘sin’ goods after compensation cess is phased out. A shift from 18 per cent slab (which applies to some goods and all services) to 15 per cent may be worthwhile. Given the time taken to receive ITC, any reduction in rates will improve cash flows and reduce the tax burden on the producer at the start of the chain. A key gap in the GST idea has been the failure to operationalise the Appellate Tribunal. With the benches in several states remaining non-functional, taxpayers continue to face uncertainty, with appeals piling up in high courts and adjudication timelines stretching.
India is no longer the economy it was in 2017. From rising to become one of the world’s top four economies to emerging as a hub for digital public infrastructure and start-up innovation, the last eight years have marked a transformational phase in India’s growth story. Running parallel to this transformation, sometimes quietly and sometimes contentiously, has been the evolution of the GST. The evolution needs to be further expedited because a tax system doesn’t just fund a nation’s development, it reflects the kind of nation we want to become.